Tax assignment

MANISHA VERMA

B.COM (H) 2ND YEAR

TUTORIAL GROUP- A3

ROLL NO. 130

Question1. Under section 43 (b) if few business expenses are not

deducted, discuss the relevant rule.

Answer- Section 43 (B) is applicable only if the taxpayer maintains

books of accounts on the basis of mercantile system of accounting.

The provisions of this section are given below-

General rule- Certain expenses are deductible on payment basis- the
following expenses (which are otherwise deductible under the other
provisions of the income-tax act) are deductible on payment basis-

a. Any sum payable by way of tax, duty, cess or fee (by whatever
name called under any law for the time being in force)
b. Any sum payable by an employer by way of contribution to
provident fund or superannuation fund or any other fund for the
welfare of employees.
c. Any sum payable as bonus or commission to employees for
service rendered.
 d. Any sum payable as interest on any loan or borrowing from a
public financial institution (i.e. ICICI, IFCI, LIC and UTI) or a state
financial corporation or a state industrial corporation.
e. Interest on any loan or advance taken from a scheduled bank
including a co-operative bank and
f. Any sum payable by an employer in lieu of leave at the credit of
his employee.

The above expenses are deductible in the year in which payment is

actually made. There is however one exception-

When deductible on accrual basis-

The exception is applicable if the following two conditions are

satisfied—

1. Payment in respect of the aforesaid expenses is actually made on

or before the due date of submission of return of income.
2. The evidence of such payment is submitted along with the return
of income.
If the above two conditions are satisfied and if the assessee
maintains books of accounts on mercantile basis, then the
expenditure is deductible on “accrual” basis in the year in which
the liability is incurred.

Question2. What is the cost of improvement? Give examples.

Answer-The provisions regarding cost of improvement are given below-

Meaning- Cost of improvement is capital expenditure incurred by an

assessee in making any additions/improvements to the capital assets. It
also includes any expenditure incurred to protect or complete the title
to the capital assets or to cure such title. To put it differently any
expenditure incurred to increase the value of the capital asset is
treated as cot of improvement.

Special provisions under the income-tax act-

The following special provisions given under section 55 in respect
of cost of improvement should also be noted-
1. Expenditure incurred before April 1, 1981 not considered- any
cost of improvement incurred before April 1, 1981 is not taken
into consideration for calculating capital gain chargeable to tax.
This rule does not have any exception. In other words cost of
improvement includes only expenditure on improvement
incurred on or before April 1, 1981. Expenditure incurred on
improvement of a capital asset before April 1, 1981 is always
taken as equal to zero.
2. Double deduction not permitted- Cost of improvement does
not include any expenditure which is deductible in computing
the income chargeable under the heads “interest on
securities”, “income from house property”, “profits and gains
of business and profession” and “income from other sources”.

Question 3.How would you find out amount of capital gain

chargeable to tax at the time of depreciable assets.
Answer- The tax incidence under the head “capital gains”
depends upon whether the capital gain is short-term or long-
term. Long term capital gain is generally taxable at a lower
rate.
But in case of transfer of a depreciable asset (other than an
asset used by a power generating unit eligible for depreciation
on straight line basis), capital gain (if any) is taken as short-
term capital gain, irrespective of period of holding.
Computation of short-term capital gain-
1. Find out full value of consideration.
2. Deduct the following-
a. Expenditure incurred wholly and exclusively in connection
with such transfer.
b. Cost of acquisition.
c. Cost of improvement.
3. From the resulting sum deduct the exemption provided by
sections 54B, 54D, 54G and 54GA.
4. The balancing amount is short-term capital gain.